Mortgage Woes - What to do?
According to the Case Shiller national home price index, house prices in July 2007 were 3.9% lower than in July 2006.
Mr Shiller, an economist at Yale University, has been quoted as saying that "The collapse of US home prices might turn out to be the most severe since the Great Depression."
The ongoing mortgage crisis in the US is affecting the construction and mortgage sectors: some of those involved are overextended homeowners, house builders, furniture suppliers and many, many mortgage companies. Some huge banks are also reporting billion dollar losses. The daily stories of gloom are having a negative effect on consumer confidence and consumer spending.
In most other parts of the world, real estate prices are not yet showing significant falls but serious problems in the US are likely to have a flow-on effect. Lenders are getting tighter on their lending criteria in many countries, even if the problems in other areas are not as marked. There has been a major shift in the attitude to risk!
What can YOU do about it? Seek an Ally in Time!
If only a fraction of these predictions become reality, it is worthwhile assessing your individual situation and taking some precautions.
It is far easier to work with time on your side rather than against you.
At present, there are approximately 5 million adjustable rate mortgages (ARMS) in America which will reset to higher rates in the next 18 months, and to much higher repayments.
Mr Bernanke (the current Fed Chairman) may cut rates further in October, but don’t count on it. Some commentators are predicting up to a million foreclosures which Mr Bernanke will want to avoid. Cutting rates is the best way of avoiding such an outcome, but other problems such as a falling US dollar, may stay his hand.
Even at current house prices, it is estimated that there are approximately $700 billion of ARM loans where the home owner is in a negative equity situation (meaning that they owe more money than the home is worth.) Thus the banks face billions of dollars of losses to come, and even if they were to repossess and sell the homes they would still have lost a lot of money. If you are a home owner with an ARM which is not yet due for reset, further cuts in interest rates may be of benefit to you, if they come to pass.
Doubtless, some of their most extended borrowers will be unable to pay the increased rates and may be forced to put their properties on the market. In recent years there has been a deluge of credit available, tempting people to take on more debt (and risk).
The repricing of credit is also a decrease in the availability of credit.
If you live elsewhere, it is worthwhile to monitor developments in the US. The increased interplay of financial systems means that you too will be affected, but will probably have more time to take measures to protect yourself and your family.
Blaming the banks or mortgage companies for the level of your debts is a fruitless exercise! Perhaps, instead of blaming your bank, you should look at your options at this point.
In a world of rapidly rising house prices, the cleverest thing to do WAS in many cases to borrow as much as you could and profit from the rise in values. Now, the times have changed and exploring the options in advance is the way to go.
Can you refinance? Can you sell at a reasonable price?
Don’t rely on being able to wait and then to make a quick sale at a reasonable price. If you have the capacity for cutting costs and saving some money, now is the time to take precautions and put some money aside. The homebuilders in the US have huge stocks of unsold new homes, which they shall be doing everything possible to move… Selling is not likely to get easier!
Can you reorganize your finances to be able to pay a higher mortgage if you have to?
These options may be worth considering:
- Even if the sum of money appears daunting, can you pay off your credit cards or car loans to have more available for higher mortgage payments?
- Now is the time to look frankly at your finances, and see where you might be spending money that you could save or put towards reducing debts. All of us have developed a certain lifestyle, and that might need some reassessment.
Is there any way to get more money each month?
- Look at whether you can raise money by selling things you no longer need or by increasing earnings from spouses or getting your teenage kids to chip in?
- Can you possibly take in a boarder or lodger to help pay the mortgage?
- What ideas do family or friends have to help the situation?
- Do you know someone in a similar situation who has some clever ideas?
- There may be some “necessities” (that aren’t really necessities at all) that you can live without, rather than end up in a foreclosure situation with a ruined credit rating.
If you are in the fortunate position of having excess money to invest, bargains will become available. There have been housing busts before and each time the market has eventually rebounded to a higher level.
At this stage, the main fall in house prices is occurring in the US, but a small fall in the UK, where house prices are even higher has occurred. In other markets such as Australia and New Zealand, there is a very high level of consumer debt, but a generalized fall in real estate prices has not occurred. The level of sub-prime borrowing is far less in these markets, but many home owners would find it difficult to cope with a rise in interest rates or a fall in prices.
The main risk of the American housing mess is a downward spiral of the US economy into recession. Don’t believe that with the rise of China, India etc, that a downturn in the US will not have global effects.
Beware if you are a Small Business Owner.
But while home owners borrowing against the value, of their homes for consumer spending or home renovations has been widely discussed, there is another effect involving small businesses, that has not been as widely mentioned. As well as borrowing for personal expenses, many small business owners in America have also borrowed against the value of their homes, to start or expand their businesses.
With house prices falling, and possible further declines, raising money by taking a home equity loan is not easy. Bankers now will not lend more than 80% against a home’s value, if they lend at all. So the unfortunate businesses face the prospect of both declining sales and far tighter credit conditions from the banks.
Mr Greenspan is estimating the risks of recession are rising in the US but are still less than 50%. Some other commentators are less optimistic. It is still hard to forecast, but all of the current economic happenings might be a recipe for some difficult times ahead. Even if they are not, working out what to do in different situations and cutting debt or saving some money now, is a good insurance policy.
September 20, 2007
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